Consider a small country applying a tariff t such as in Figure 8-5. Instead of a tariff on all units imported, however, we will suppose that the tariff applies only to imports in excess of some quota amount Mʹ (which is less than the total imports). This is called a "tariff-rate quota" (TRQ) and is commonly used on agricultural goods.
a. Redraw Figure 8-5, introducing the quota amount Mʹ. Remember that the tariff applies only to imports in excess of this amount. With this in mind, what is the rectangle of tariff revenue collected? What is the rectangle of quota rents? Explain briefly what quota rents mean in this scenario.
b. How does the use of a TRQ rather than a tariff at the same rate affect Home welfare? How does the TRQ, as compared with a tariff at the same rate, affect Foreign welfare? Does it depend on who gets the quota rents?

c. Based on your answer to (b), why do you think TRQs are used quite often?

Price Price x*+t S1S2 D1 Quantity M' M2 M Imports (a) Domestic market (b) Import market